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org

July 6, 2016
Via electronic mail (chiefclerk@tdi.texas.gov)
Commissioner David Mattax
c/o Office of the Chief Clerk
Texas Department of Insurance
P.O. Box 149104
Austin, TX 78714-9104
Re:

Docket No. 2788; written testimony concerning the prohibition of pre-dispute
mandatory binding arbitration clauses in homeowners insurance policies and
endorsements

Dear Commissioner Mattax:
Texas Watch is a statewide, non-partisan, non-profit consumer research and advocacy
organization representing over 20,000 people. As you know, a large portion of our work concerns
the protection of policyholders. We appreciate the opportunity to appear before you today.
This document and related attachments contain our written testimony in opposition to Texas Farm
Bureau’s proposed pre-dispute binding homeowners arbitration endorsement, as well as any other
such endorsements or forms that may come before the Texas Department of Insurance (TDI). The
filing of this endorsement is an alarming development for families all across this state because it
imperils both their shelter and the greatest source of their wealth – their home. Approval of such
an endorsement would inevitably lead to a race to the bottom by other carriers, effectively
stripping millions of people of their constitutional right to trial by jury, the most important
consumer protection available to them.
We write to respectfully request that you follow the long-standing policy of TDI and continue to
prohibit the inclusion of mandatory binding pre-dispute arbitration clauses in residential insurance
contracts. TDI’s homeowners insurance policy review guidelines wisely reflect this policy.1 Previous
commissioners, through many administrations, have resisted the pressure of industry,
understanding that mandatory binding pre-dispute arbitration clauses have no place in personal
lines policies. They have followed their statutory duty to “protect and ensure the fair treatment of
consumers”2 in this way. We ask that you receive the wisdom of your predecessors and do the
same.
1

See “Review Requirements Checklist Residential Property,” TDI,
http://www.tdi.texas.gov/commercial/pcckhome.html.
2
TEX. INS. CODE §31.002 (4).

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As set out more fully below, nearly half of the states in our country have already taken action to
eliminate or limit arbitration in insurance contracts. Moreover, Texas courts have already
underscored the state’s authority to regulate the use of arbitration by insurance carriers.
Insurance consumers, and especially personal lines policyholders, occupy a uniquely vulnerable
position. Presented with non-negotiable, take-it-or-leave-it contracts of adhesion written in
opaque legalese, forced to part with their dollars up front in exchange for a promise of
performance in the future should a peril occur, and required to purchase insurance products, they
have no leverage over – or bargaining power with – their insurance carrier for at least two reasons.
First, the coverage they must purchase is much more of a necessity than a commodity, as they
effectively cannot choose to go without. In the case of personal automobile coverage, our laws
require insurance in recognition of the need for financial responsibility while navigating our shared
roadways. Lending practices require that the homeowner maintain residential property insurance
in order to protect the bank’s collateral. As such, normal market forces are skewed in the personal
lines because the demand curve is basically set for these products. Because industry actors do not
face the prospect of a reduction in demand for their products, and the attendant pressures that
falling demand would bring to improve both goods and services, the need for close oversight of
the industry is heightened.
Second, even if policyholders are presented with a so-called optional endorsement, they did not
write a single word of that clause. If policyholders are enticed to accept the endorsement in
exchange for a discount, they have not bargained or negotiated in any real sense. Consider how
often insurers petition you for a rate reduction. Faced with habitually-high premiums across the
board in this state, Texans are making these so-called choices under duress. Having seen their
coverage drastically scaled back through rising deductibles and the move to national forms over
the last decade and a half, Texas families have no real choice at all. Their options consist of bad
and worst. As we have discussed, they often stay with the devil they know or shop on price alone
out of desperation, which can lead to disastrous consequences. This is why TDI, and the
commissioner specifically, must protect policyholders from sharp dealing and industry abuse.
To put it bluntly, industry holds the cards. Coupling industry’s power with arbitration would mean
that they hold the entire deck. Indeed, the New York Times has recently – and deeply – reported
on how this private process amounts to “stacking the deck of justice” against consumers.3 We
would encourage you to read this series in its entirety.4 Their editorial board concluded: “In recent
3

See “Arbitration Everywhere, Stacking the Deck of Justice,” Jessica Silver-Greenberg and Robert Gebeloff, New York
Times, 10/31/15, http://www.nytimes.com/2015/11/01/business/dealbook/arbitration-everywhere-stacking-thedeck-of-justice.html?_r=1; see also “In Arbitration, a ‘Privatization of the Justice System,’” Jessica Silver-Greenberg
and Michael Corkery, New York Times, 11/1/15, http://www.nytimes.com/2015/11/02/business/dealbook/inarbitration-a-privatization-of-the-justice-system.html?version=meter+at+1&module=meterLinks&pgtype=article&contentId=&mediaId=&referrer=&priority=true&action=click&contentCollection=meter-linksclick.
4
See also “Banks vs. Consumers (Guess Who Wins),” Robert Berner, Bloomberg Businessweek, 6/4/08,
http://www.bloomberg.com/news/articles/2008-06-04/banks-vs-dot-consumers-guess-who-wins.

Page 2 of 11

years, America’s corporations have created a private system for handling disputes that benefits
them greatly while denying consumers their day in court… [C]orporations effectively control the
arbitration process, including the selection of the arbitrator and the rules of evidence, a stacked
deck if ever there was one... A common refrain was the disbelief that this could happen in
America. But it is happening, and it needs to stop.”5
The last and most direct line of defense that policyholders possess against abuse by the insurance
industry are the rights and remedies provided by Texas common and statutory law, including
Chapters 541 and 542 of the Texas Insurance Code. These carefully-considered and long-standing
statutes protect policyholders from unfair insurance practices and deliberate delays in the
payment of legitimate claims.
The Legislature has clearly directed that policyholders’ legal disputes be resolved through the
courts, not arbitration. For example, if you search the text of Chapter 541, you will find the word
“court” mentioned over sixty (60) times. The word “arbitrate” or “arbitration” does not appear at
all in this chapter. When the Legislature takes pen in hand and writes statutes, words are chosen
with a particular purpose. The inclusion of particular words – and the lack of inclusion of others –
has importance as a matter of statutory construction. The Legislature could have said that disputes
under Chapter 541 concerning unfair or deceptive practices could be arbitrated, but they did not
say this. In fact, they said the exact opposite: These disputes are to be resolved exclusively through
our court system. Agencies properly execute the laws that are written by the Legislature; they do
not rewrite them through administrative action, such as that proposed by Farm Bureau.
For policyholders who have been beset by rising premiums and shrinking coverage, the last thing
these families need is for industry to eviscerate their remaining legal protections through the
imposition of pre-dispute mandatory binding arbitration clauses. If you allowed industry to do so
through the approval of an arbitration clause, you would both imperil consumers and violate the
will of the Legislature, which has been expressed through the passage – and maintenance – of
these important statutes.
To approve arbitration, in any form, through any mechanism, within personal lines policies would
be unconscionable and would violate public policy, which, as we would hope you would agree, is
most appropriately set by the Texas Legislature and not the executive branch. A recent example of
the Legislature setting public policy in the area of personal lines policies is the passage of SB 1567
in 2013,6 concerning limitations on the use of named-driver automobile policies. The Legislature
has given direction that it wants more – not fewer – protections for consumers in the insurance
marketplace. It spoke again – and loudly – last session with the sound rejection of SB 1628, which
would have eviscerated policyholders’ legal rights.7 The public policy of this state is clear:

5

“Arbitrating Disputes, Denying Justice,” editorial board, New York Times, 11/7/15,
http://www.nytimes.com/2015/11/08/opinion/sunday/arbitrating-disputes-denying-justice.html?_r=0.
6
SB 1567, 83rd Legislature, Regular Session, effective 9/1/13,
http://www.capitol.state.tx.us/BillLookup/history.aspx?LegSess=83R&Bill=SB1567.
7
SB 1628, 84th Legislature, Regular Session,
http://www.capitol.state.tx.us/BillLookup/history.aspx?LegSess=84R&Bill=SB1628.

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insurance consumers are to be protected when it comes to coverage and their procedural and
substantive legal rights.
To the extent that you are authorized to consider public policy on coverage matters, you are
allowed to do so in one instance – the disapproval or withdrawal of forms, not the approval of new
forms or endorsements.8 Section 2301.007 of the Texas Insurance Code reads, in pertinent part,
“The commissioner may disapprove a form… or withdraw approval of a form if the form… contains
a provision… that is unjust or deceptive, encourages misrepresentation, or violates public policy.”9
The Legislature further states that the purpose of this law is to “regulate the insurance forms used
for lines of insurance to which this subchapter applies to ensure that the forms are not unjust,
unfair, inequitable, misleading, or deceptive (emphasis added).”10 The Legislature has clearly
directed you to protect policyholders by disapproving forms that would hurt the public, not
approving forms that are written by and for the benefit of industry.
TDI has properly followed the directives of the Legislature in the life settlement insurance sphere.
Texas Insurance Code Sec. 1111A.005(c) states: “The commissioner shall disapprove a life
settlement contract form or disclosure statement form if, in the commissioner's opinion, the
contract or contract provisions fail to meet the requirements of Sections 1111A.011, 1111A.012,
1111A.014, and 1111A.023(b), or are unreasonable, contrary to the interests of the public, or
otherwise misleading or unfair to the owner.” Accordingly, TDI’s “Life Settlement Forms Checklist”
reads: “The Texas Department of Insurance is required to verify that approved forms allow
consumers all statutory protections granted by the legislature, including rights, benefits, and
remedies relating to court access in insurance actions. Mandatory binding arbitration and waiver
of jury trial clauses are prohibited because they deny consumers statutorily guaranteed access to
courts. Statutory consumer protections include: Texas Insurance Code Chapters 541, 542, and
544.”11
TDI correctly states that mandatory binding arbitration clauses would deny policyholders
“statutorily guaranteed access to courts” where they have the ability to prosecute their rights
under Chapters 541, 542, and 544 in the life settlement context. The statutory language
concerning form disapproval is substantially similar under Chapter 1111A when compared to that
under Chapter 2301, with both chapters directing the commissioner to disapprove forms that
would mislead or imperil the public. The same reasoning applies between these chapters;
therefore, just as is the case for life settlement insurance, we should continue to prohibit the
inclusion of pre-dispute binding arbitration clauses in property-casualty forms to ensure Texas
families continue to possess “statutorily guaranteed” access to our courts.
Arbitration may be a suitable forum if two sophisticated businesses of comparable bargaining
power, with the advice of their own legal teams, voluntarily elect to settle their commercial
disputes in this manner. However, pre-dispute binding arbitration is wildly inappropriate for
8

See TEX. INS. CODE § 2301.007 (http://www.statutes.legis.state.tx.us/SOTWDocs/IN/htm/IN.2301.htm).
TEX. INS. CODE § 2301.007 (a)(2).
10
TEX. INS. CODE § 2301.001 (2).
11
See http://www.tdi.texas.gov/forms/lhlifehealth/lac026.pdf.
9

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resolving consumer disputes, especially those related to insurance where the bargaining power is
so asymmetrical in favor of the carriers. TDI has long understood this distinction, treating
individual policyholders differently than commercial policyholders and protecting them from predispute binding arbitration in many lines of insurance, including the following: automobile;12 farm
and ranch;13 personal inland marine;14 personal credit;15 identity theft;16 and title.17
TDI has consistently recognized the problem posed for individual policyholders, noting in its
biennial report to the 82nd Legislature that “pre-dispute mandatory binding arbitration precludes
covered persons, who are not able to negotiate the terms of their contract with the carrier in the
same way that other contracting parties are able to negotiate their contract terms, from exercising
substantive rights provided by the Texas Insurance Code.”18
As your predecessors have recognized, consumer arbitration – especially in the insurance context
– is, to quote the standard in Chapter 2301 of the Insurance Code, “unfair, inequitable, misleading,
and deceptive.”
The problems with consumer arbitration, which cause it to be so, are myriad and set forth below:

Repeat Player Effect: Companies Win, Consumers Lose
When one party or industry routinely engages arbitrators and another litigant does not, a
perverse dynamic can be created, known as the “repeat player” effect.19 Arbitrators are
often selected from a panel, often comprised of those who have been professionallyaligned with industry interests, and they know which party is buttering their bread when
they are selected time and again. If an arbitrator starts ruling too often against that side,
they will risk disfavor with that industry and will not enjoy selection to arbitrate future
cases. The arbitrator’s paycheck depends upon staying in the repeat player’s good graces.
At base, the industry and the arbitrator give one another preferential treatment, which is
to their mutual benefit but has nothing to do with justice. As the authors of an empirical

12

See http://www.tdi.texas.gov/commercial/pcckautp.html.
See http://www.tdi.texas.gov/commercial/pcckfarm.html.
14
See http://www.tdi.texas.gov/commercial/pcckimp.html.
15
See http://www.tdi.texas.gov/commercial/pcckcdtp.html.
16
See http://www.tdi.texas.gov/commercial/pcckidtf.html.
17
See http://www.tdi.texas.gov/title/titlem4g.html.
18
“Biennial Report to the 82nd Legislature,” Texas Department of Insurance, December 2012, at p. 41,
http://www.tdi.texas.gov/reports/documents/finalbie13.pdf.
19
See, e.g., “What are the differences between a judge and a private arbitrator hearing a case?” Arbitration Q&A,
Public Citizen, http://www.citizen.org/congress/article_redirect.cfm?ID=7490; “The Arbitration Trap,” Public Citizen,
September 2007, http://www.citizen.org/publications/publicationredirect.cfm?ID=7545; Lisa B. Bingham,
Employment Arbitration: The Repeat Player Effect, 1 Emp. Rts. & Emp. Pol’y J. 189 (1997) (finding employees recover a
lower percentage of their claims in repeat player cases as compared to non-repeat player cases); David S. Schwartz,
Enforcing Small Print to Protect Big Business: Employee and Consumer Rights Claims in an Age of Compelled
Arbitration, 1997 Wis. L. Rev. 33, 60, 61, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1499953.
13

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study of American Arbitration Association complaints recently stated, “[F]requently
arbitrating entities win more and pay less in damages than one-shot entities.”20
The Consumer Financial Protection Bureau (CFPB) recently concluded and published an
extensive study on the use of arbitration clauses in consumer financial contracts.21 Texas
Watch testified before the CFPB during their field hearings in Dallas. Among the important
findings in this comprehensive report are the following: (1) “Consumers are generally
unaware of whether their credit card contracts include arbitration clauses. Consumers with
such clauses in their agreements generally either do not know whether they can sue in
court or wrongly believe that they can do so;”22 (2) “Of the 341 cases filed in 2010 and
2011 that were resolved by an arbitrator and where we were able to ascertain the
outcome, consumers obtained relief regarding their affirmative claims in 32 disputes.
Consumers obtained debt forbearance in 46 cases (in five of which the consumers also
obtained affirmative relief). The total amount of affirmative relief awarded was $172,433
and total debt forbearance was $189,107;”23 and (3) “Of the 244 cases in which companies
made claims or counterclaims that were resolved by arbitrators in a manner that we were
able to determine, companies obtained relief in 227 disputes. The total amount of such
relief was $2,806,662. These totals include 60 cases in which the company advanced fees
for the consumer and obtained an award without participation by the consumer after
notice by the AAA. Excluding those 60 cases, the total amount of relief awarded by
arbitrators to companies was $2,017,486.”24 This empirical analysis indicates that
arbitration favors companies. It should be no surprise, then, that companies seek to move
consumer disputes into arbitration; they are seeking advantage, not justice.
This prejudice would undoubtedly arise in the insurance context. If pre-dispute mandatory
binding arbitration clauses were allowed – given the volume of disputes arising from their
many customers – insurers would routinely engage arbitrators while an individual
homeowner would be roped into “selecting” an arbitrator just once. It is not difficult to
imagine where the arbitrator’s allegiance would lie in short order. This is exacerbated even
more so if the insurer is paying the arbitrator’s fees. This species of selection bias
completely undermines our long-held values of impartial and independent justice and
should be resisted at every turn.

Process Defects: Cost & Limited Discovery
Consumer arbitration suffers from other process-oriented defects. Arbitration requires the
parties to essentially hire a private judge (or attorney), who typically has a high hourly rate,

20

Horton, David and Chandrasekher, Andrea Cann, After the Revolution: An Empirical Study of Consumer Arbitration
(June 4, 2015). Georgetown Law Journal, Vol. 104, 2015, Forthcoming; UC Davis Legal Studies Research Paper No. 436.
Available at SSRN: http://ssrn.com/abstract=2614773.
21
“Arbitration Study: Report to Congress, pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act §
1028(a),” Consumer Financial Protection Bureau, 2016, http://www.consumerfinance.gov/data-research/researchreports/arbitration-study-report-to-congress-2015/.
22
Id. at 11.
23
Id. at 12.
24
Id.

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meaning the fees incurred are often prohibitively expensive for many individuals.25
Discovery is often limited if not eliminated altogether in arbitration, making it difficult for
the aggrieved party to determine the full extent of the wrongdoing committed against it.26
As noted above, if industry pays the arbitrator’s fees, he who pays the fiddler calls the
tune. Contrast this with our courts, with which you are well acquainted professionally,
where each party is afforded the benefit of full discovery under well-established rules. Each
party likewise pays modest fees to access the system, with the larger costs borne by the
citizenry in support of a crucial and co-equal branch of a functioning government,
maintaining a civil, peaceful, orderly society in the process. Stated simply, we already have
a dispute resolution solution, for which we have all paid, free of these defects. It is called
our courts. Alternatives are not required for insurance consumers.

Consumer Confusion: Lack of Meaningful Consent
Consumers fundamentally do not understand arbitration and the effect it has on their
constitutional rights. In our experience, many confuse arbitration with mediation, which, as
you know, is a negotiation facilitated by a neutral third party that is non-binding unless the
parties reach a mutually-satisfactory agreement. Pre-dispute mandatory binding
arbitration is, of course, different in every meaningful respect, but the catch-all term
“alternative dispute resolution,” pushed by its proponents, can understandably create
confusion among a busy public concerned with pressing needs like finding work,
maintaining a roof over their heads, keeping food in their mouths, and providing an
education for their children.
Even when the public is stopped and made to read and consider a typical arbitration clause
carefully, the process is so far removed from their experience – and their expectations of
justice – that it precludes comprehension. Researchers at St. John’s School of Law recently
conducted an extensive empirical study of arbitration concerning “the extent to which
consumers are aware of and understand the effect of arbitration clauses in consumer
contracts.”27 Their findings demonstrate that meaningful consent is not given in the
consumer arbitration context. After being shown a typical consumer contract containing an
arbitration clause – which was printed in bold with portions in italics and capital letters –
and questioned about their own experiences with actual consumer contracts: “43% of
respondents recognized that the sample contract included an arbitration clause, 61% of
those believed that consumers would, nevertheless, have a right to have a court decide a
dispute too large for a small claims court. Less than 9% realized both that the contract had

25

See Harry T. Edwards, Where Are We Headed With Mandatory Arbitration of Statutory Claims in Employment?, 16
Ga. St. U. L. Rev. 293, 306-307 (1999) (demonstrating how employment arbitration is neither efficient nor cost
effective), http://readingroom.law.gsu.edu/gsulr/vol16/iss2/2/.
26
See Mark E. Budnitz, Arbitration of Disputes Between Consumers and Financial Institutions: A Serious Threat to
Consumer Protection, 10 Ohio St. J. on Disp. Resol. 267, 283, 284 (1995).
27
Sovern, Jeff and Greenberg, Elayne E. and Kirgis, Paul F. and Liu, Yuxiang, 'Whimsy Little Contracts' with Unexpected
Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements (February 19, 2015). 75
Maryland Law Review 1 (2015); St. John's Legal Studies Research Paper No. 14-0009. Available at SSRN:
http://ssrn.com/abstract=2516432 or http://dx.doi.org/10.2139/ssrn.2516432.

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an arbitration clause and that it would prevent consumers from proceeding in court.” 28
Ultimately, of the more than 5,000 answers recorded to questions that offered right and
wrong answers, only a quarter were correct.29
The authors’ study involved a credit card contract. One can imagine how consumer
comprehension would drop even lower when endorsements are appended to insurance
contracts, which are so complicated and full of legalese that an entire subspecialty of
lawyers (i.e., coverage attorneys) are handsomely compensated to interpret them. Faced
with the results of this important study, we must understand that meaningful consumer
consent to an arbitration clause in the insurance context is a fiction.

Secrecy: Confidential & Unappealable
Arbitration typically takes place behind a veil of secrecy, where the parties are bound by
confidentiality agreements to keep facts about the dispute and the arbitrator’s decision
quiet. This defeats the public justice component of our judicial system, which enables
society to learn of dangers, allows market actors to make rational decisions, rewards safe
conduct, and deters corner-cutting that puts lives at risk. Public justice is integral to public
safety and insurance is integral to financial security and economic development, meaning
insurance arbitration would imperil not just individuals but entire communities.
At the end of the process, arbitrators “have no obligation to the court to give their reasons
for an award,”30 and consumers are severely limited in their ability to appeal an arbitrator’s
erroneous decision, requiring a showing of “manifest disregard of the law,” 31 which is a
hurdle that is often impossibly high to clear. When the law is not followed with fidelity, the
reality is that the less powerful party is most often made to suffer. Furthermore, through
secret proceedings, the common law withers on the vine, doing violence to the judiciary
and eroding the rules that we all agree to live by.
Yale Law Professor Judith Resnick has written that arbitration “strips individuals of access
to courts to enforce state and federal rights, strips the public of its rights of audience to
observe state-empowered decision makers imposing legally binding decisions, and strips
the courts of their obligation to respond to alleged injuries,”32 further noting how the
businesses that “shaped” arbitration “preferred to have their disputes off screen, and they
obliged arbitrators to keep confidential what they learned and did.”33

28

Id. at abstract.
Id.
30
United Steelworkers of Am. v. Enter. Wheel & Car Corp., 363 U.S. 593, 598, 4 L. Ed. 2d 1424, 80 S. Ct. 1358 (1960).
31
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942, 115 S. Ct. 1920, 131 L. Ed. 2d 985 (1995) (citing Wilko v.
Swan, 346 U.S. 427, 436, 74 S. Ct. 182, 98 L. Ed. 168 (1953)).
32
“Diffusing Disputes: The Public in the Private of Arbitration, the Private in Courts, and the Erasure of Rights,” Judith
Resnick, The Yale Law Journal, vol. 124, no. 8 (2015), p. 2811, http://www.yalelawjournal.org/feature/diffusingdisputes.
33
Id. at 2894.
29

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You see this in the arbitration clause currently before you. Farm Bureau insists upon
complete confidentiality. Mr. Commissioner, you have spent your career as a public
servant, subject to scrutiny by those you have served. Our judiciary is held to the same high
standard, and while our courts are open, businesses desire to have disputes concerning
their actions disposed of behind closed doors, out of the light of day.
Transparency promotes honesty. Sunshine is the best disinfectant. And arbitration is
conducted in the dark.
While the Federal Arbitration Act (FAA)34 casts a long shadow over this area of the law, the
McCarran-Ferguson Act,35 which largely delegates regulation of the business of insurance to the
states, casts a longer shadow. Even in cases where interstate commerce is at issue, bringing the
FAA into play, state laws may restrict the arbitration of insurance-related disputes. Where there is
a state statute regulating the business of insurance that limits the enforceability of an arbitration
clause, a conflict is created between the state statute and the FAA, leading to “reverse
preemption” of the FAA, meaning the state law, not the FAA, determines whether or not the
arbitration provision may be enforced.36 The reflexive thought that the FAA automatically trumps
all does not hold in the insurance context. Given McCarran-Ferguson, states clearly have the
power to prevent the arbitration of insurance disputes.
Texas has its own statute pertaining to arbitration,37 and the First Court of Appeals in Houston
found in Stewart Title Guar. Co. v. Mack38 that a dispute over a title insurance policy was not
arbitrable under the Texas Arbitration Act because it was fundamentally a contract for personal
property, the consideration paid was under $50,000 (a premium of $1,670), and the arbitration
agreement was not signed by counsel as required by the statute (emphasis added). This case
underscores the fact that we, at the state level, have the power to protect policyholders by
banning insurance arbitration clauses.

34

9 USC §1, et seq.
15 USC §§ 1011-1015.
36
See, e.g., Munich Am. Reinsurance Co. v. Crawford, 141 F.3d 585 (5th Cir. 1998) (holding the FAA was “reverse preempted by Oklahoma law under the McCarran-Ferguson Act”). See also Continental Insurance v. Equity Residential
Properties Trust, 565 S.E.2d 603, 604 (2002) (McCarran-Ferguson barred the FAA from preempting the anti-arbitration
provisions of Georgia law); Standard Security Life Ins. Co. of New York v. West, 267 F.3d 821, 823 (8th Cir. 2001) (state
statute limiting arbitration insurance not preempted by the FAA because the FAA is reverse-preempted by McCarranFerguson due to the fact that it regulate[s] the business of insurance and applies to the processing of disputed claims);
Mutual Reinsurance Bureau v. Great Plains Mutual Ins. Co., 969 F.2d 931, 932 (10th Cir. 1992) (statute enacted for the
purpose of regulating the business of insurance; therefore, McCarran-Ferguson precluded preemption of the statute
by the FAA); Quackenbush v. Allstate Ins. Co., 121 F.3d 1372 (9th Cir. 1997) (insurance statute prohibiting insurance
liquidator from being compelled to arbitrate disputes prevails over FAA); Kruger Clinic Orthopedics v. Regence
Blueshield, 138 P.3d 936 (Wash. 2006) (state statute and regulation prohibiting binding arbitration clauses in contracts
between insurers and health providers deemed a regulation of insurance that McCarran-Ferguson saves from FAA
preemption).
37
TEX. CIV. PRAC. & REM. CODE §171.001, et seq.
38
945 S.W.2d 330, 332 (Tex. App-Houston [1st Dist.] 1997, writ dism’d).
35

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Texas should follow the lead of states like South Dakota, which flatly voids all insurance arbitration
clauses.39 While the National Association of Insurance Commissioners could provide a
comprehensive list, all told, according the best information available, at least twenty-three states
(plus the District of Columbia) contain either general or limited restrictions on the use of
mandatory arbitration in insurance policies, taking special care to protect personal lines
policyholders.40
Farm Bureau and other industry actors have alleged that they are being deluged with frivolous
policyholder lawsuits. They have many ways to dispose of meritless cases under existing law,
whether under the terms of the Insurance Code, Deceptive Trade Practices Act, Civil Practice and
Remedies Code, or Rules of Civil Procedure.41 If they choose not to do so, or are unable to do so,
this is an acknowledgment that there are live, ripe, colorable claims that require resolution
through our courts. This is how our system properly works. Mr. Commissioner, you are wellacquainted with the checks and balances in our system given your long service as an officer of the
court.
There is a reason why Farm Bureau proposes to offer a “discount” to consumers, however illusory
this so-called discount may be (in that it would be equivalent to their increase in rates). It is
because they know the arbitration process will favor them and disfavor consumers. Policyholders
will not be able to build their case and uncover wrongdoing through a full discovery process.
Awards from arbitrators familiar with carriers and unfamiliar with individual litigants will be lower.
More cases will be dismissed outright. Policyholders, in short, will lose. Why else would Farm
Bureau expend the resources behind this effort and place such extraordinary demands on TDI?
If carriers wish to lower their loss adjustment expenses, there is a fool-proof way to do so: Pay 100
cents on the dollar and pay claims on time. If they will simply do this, upholding their end of the
bargain, they will face zero liability from policyholders, who, it should be noted, pay 100 cents on
the dollar, in a timely way, in the form of their premiums and deductibles. This, of course, is the
rationale behind the penalties present in our carefully-crafted laws: to force carriers to follow
through when policyholders are in need. Bluntly stated, the solution is for carriers to perform their

39

S.D. Codified Laws § 21-25A-3 (excepting contractual provisions for arbitration entered into between insurance
companies), http://legis.state.sd.us/statutes/DisplayStatute.aspx?Type=Statute&Statute=21-25A-3.
40
See Ark. Code Ann. § 16-108-201 (Arkansas); Cal. Ins. Code § 10123.19 and Cal. Health & Safety Code § 1363.1
(California); D.C. Code § 16-4403 (District of Columbia); Ga. Code Ann. § 9-9-2 (Georgia); Haw. Rev. Stat. § 431:10-221
(Hawaii); Iowa Code Ann. § 679A.1 (Iowa); Kan. Stat. Ann. § 5-401 (Kansas); Ky. Rev. Stat. Ann. § 417.050 and Ky. Rev.
Stat. Ann. § 304.20-050 (Kentucky); La. Rev. Stat. Ann. § 22:1295 (5) and La. Rev. Stat. Ann. § 22:868 (Louisiana); Me.
Rev. Stat. Ann. Tit. 14 § 5948 and 24-A § 2747 (Maine); Md. Code Ann., Cts. & Jud. Proc. § 3-206.1 and Md. Code Ann.
Ins. § 19-509 and Md. Ins. Admin. 31.11.10.07 (Maryland); Miss. Code Ann. § 83-11-109 (Mississippi); Mo. Ann. Stat. §
435.350 (Missouri); Mont. Code Ann. § 27-5-114 (Montana); Neb. Rev. Stat. § 25-2602.01 (Nebraska); Nev. Rev. Stat. §
690 B.017 and Nev. Rev. Stat. § 689 B.067 (Nevada); Okla. Stat. Tit. 12 § 1855 (Oklahoma); R.I. Gen. Laws § 10-3-2 and
R.I. Gen. Laws § 27-10.3-1 (Rhode Island); S.C. Code Ann. § 15-48-10 and S.C. Code Ann. § 38-77-200 (South Carolina);
S.D. Codified Laws § 21-25 A-3 (South Dakota); Utah Code Ann. § 31A-21-313 and Utah Admin. Code R. 590-122
(Utah); Va. Code Ann. § 38.2-312 and Administrative Letter 1998-12 (Virginia); W.Va. Code § 33-6-31 (West Virginia);
and Wyo. ADC Ins. Gen. Ch. 23 § 9 (Wyoming).
41
See “Existing Penalties & Procedures in Texas Law: Insurance,” Texas Watch, 2016, which is enclosed.

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obligations, not for them to attempt to escape the law through the proliferation of pre-dispute
binding arbitration clauses.
TDI’s duty to the public calls for a continued prohibition on the use of forced arbitration by
residential insurance carriers. Failure to do so would encourage a race to the bottom by carriers,
as each market “competitor” would inevitably seek to escape the full weight of our laws through
arbitration to further fatten their bottom lines. This would only devalue insurance coverage to an
even greater extent and endanger the millions of Texas families who count on their regulator as
the first line of defense against predatory practices. If deserving Texans cannot recover the full
measure of their damages, they cannot rebuild after disaster strikes. And when Texans cannot
rebuild, businesses cannot prosper.
We respectfully urge you to follow the example of those who have held this important position
over many years, heard the same arguments industry offers today, and rejected them in full. We
ask that you disapprove any carrier’s request for pre-dispute mandatory binding arbitration
without delay. It is the right thing to do for the people of this state, whom you are entrusted to
protect. Texas families are looking to – and relying upon – you, Commissioner Mattax.
Sincerely,

N. Alex Winslow
Executive Director

Ware V. Wendell
Deputy Director

Encl.
cc:

Ms. Marilyn Hamilton, Director, Property and Casualty Lines (via electronic mail)

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